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In complete makeover, Avon pins hopes on foreign consumers

Avon (AVP) CEO Sheri McCoy faces a daunting task: making the 130-year-old direct seller of beauty products attractive in the eyes of investors.

One step in that makeover in mind involves the New York-based company moving is headquarters to the U.K. and effectively withdrawing from the market where it made its name. Avon is moving to sell its money-losing North American businessto private equity firm Cerberus Capital Management for $435 million so it can focus on faster-growing international markets in Latin America, Europe and Asia.

The company is also slashing its workforce by 2,500 jobs, among other steps it is taking to cut $350 million in costs.

Avon insists it is not relinquishing its corporate citizenship to lower the company's tax bill, an increasingly popular maneuver known as an "inversion." Avon plans to keep its listing on the New York Sock Exchange and maintain its existing offices in Rye and Suffern, New York.

What's clear is that Avon must do something to stanch the red ink. Its shares have plunged nearly 50 percent over the past year, underscoring the challenges that Wall Street sees for the company. And despite its heightened focus on sales overseas, Avon is also feeling the pain internationally. Brazil, a key company market, faces its worst economic crisis in 70 years because of a political corruption scandal. Avon also is dependent on other countries with troubled economies, such as Venezuela, Mexico and Russia.

Another problem, one common in the direct-sales industry, is Avon's struggle to retain salespeople. The company's churn rate for these part-time workers tops 100 percent, although that has improved of late.

Wall Street analysts also think that Avon's move to boost product prices will bolster its bottom line.

"The sale of the loss-making North American business to Cerberus effectively allowed [Avon] to focus its capital, talent and strategies on its core income-contributing geographies," wrote Stephanie Wissink, an analyst with Piper Jaffray who rates the stock as "outperform," in a note to clients. "While we expect global market volatility to persist through 2016-17, we see benefits of a concentrated and dedicated approach alongside corporate cost realignment."

McCoy faces pressure to improve its financial performance from activist investor Barrington Capital, which has been pressing for changes at Avon. In a statement earlier this week, the investment firm said Avon needs to do more, while praising its efforts to cut costs as a step in the right direction.

Whether the chief executive will get enough time to execute on her strategy is hard to say, according to analysts. "That will be a question that will continue to surface," Wissik said in an interview. "The stock price erosion has been pretty pronounced."

Another Avon weakness is its thin operating margins, which are about 6 percent, less than half of what direct-sales rivals such as Herbalife (HLF), Tupperware (TUP) and NuSkin (NUS), whose stocks have also performed better than the beauty company.

Much of that "margin destruction" was caused by the conversion of lower-valued foreign currencies into dollars, whose strength makes American goods more expensive overseas, according to Deutsche Bank analyst Bill Schmitz Jr., who also pointed to Avon's failed efforts to turn around its North American business.

"If they get it right -- and it's going to take a lot of work -- there is probably not a better model to embrace what's going on," said Schmitz Jr., who rates the company's shares as "outperform." "If the emerging markets just stabilize or even recover a little bit, they are going to get bailed out."

Avon also plans to spend $500 million on transforming itself over the next three years as it tries to bolster its e-commerce business and improve its supply chain. The company is also working to improve its product line and cull poor-selling items from its catalogue.

Investors will wait and see if these changes are more than skin deep.

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